Understanding Pre-Money Valuation: A Guide for Investors

If you are considering investing in a company, pre-money valuation is something that you will want to be aware of. Here are the basics of pre-money valuation and how it can affect you as an investor.

Pre-Money Valuation

Before investors decide to provide venture capital to a company, they will first need to value the company. If you are going to be investing a substantial amount of money in a company, you want to know how much it is worth first. This will provide you with answers as to how much of the company you will now own.

When you come up with a value for the company, you need to determine how much the value is before you contribute your investment to it. This is called pre-money valuation and it can make a big difference in what percentage of the company you own.

Example

Let's say that you are going to contribute $25,000 to a company. The company is said to be valued at $100,000. However, whether this number is used before or after you contribute your money makes a big difference. If you use pre-money valuation, you will take the $100,000 and add $25,000 to it. This provides a value of $125,000 and you own 20% of the company. The other way, you would contribute $25,000 out of $100,000. This would raise your ownership percentage to 25% of the company.